A federal appeals court upheld a sentence that didn’t include prison time for H. Ty Warner, the billionaire creator of Beanie Babies plush toys, who evaded $5.6 million in taxes after hiding money in a Swiss bank account.
The ruling Friday by the appeals court in Chicago was a setback for U.S. prosecutors, who argued that Warner deserved at least a year in prison after pleading guilty. A three-judge panel ruled the sentence of two years of probation and 500 hours of community service at three Chicago-area schools was appropriate.
The panel said the sentencing judge cited Warner’s charitable giving, his unsuccessful attempt to disclose the account to the Internal Revenue Service, and his civil penalty of $53.6 million. Warner also paid $14 million in back taxes and interest, and gave $140 million in cash and toys to charities, according to his lawyers.
“The district judge found Warner’s record of charity and benevolence ‘overwhelming,’” the panel wrote. “The court here did not abuse its discretion. Rather, it fully explained and supported its decision and reached an outcome that is reasonable under the unique circumstances of this case.”
Warner’s evasion was the largest of more than 100 cases brought since 2009 against taxpayers and enablers who used offshore accounts to cheat the IRS. Failing to win a prison term might weaken the hand of prosecutors in other cases around the U.S. Judges have great discretion in imposing sentences, and can be overturned only if they acted unreasonably.
Joseph Fitzpatrick, a spokesman for the U.S. attorney’s office in Chicago, declined to comment. Warner attorney Gregory R. Scandaglia said he was gratified that U.S. District Judge Charles Kocoras’s sentencing was affirmed.
“Mr. Warner accepted responsibility for his actions,” Scandaglia said in an e-mail. “He has paid over $80 million in penalties, fines and taxes to the federal government. He has also eagerly fulfilled his community service program and looks forward to continuing his work with students.”
The appellate panel said Kocoras acted correctly on procedural and substantive grounds. Prosecutors said he put too much weight on his charitable contributions and letters of support, and too little on the seriousness of the crime, deterrence to others and a comparison with other offenders.
While prosecutors disputed Warner’s claim that he gave away $140 million, saying he only gave $35.7 million, the key was what it revealed about his character, the judges wrote. The judge’s conclusion was within his discretion, they said.
The panel disputed the argument by prosecutors that Warner used his wealth as a “get-out-of-jail card.” Rather, the judge “looked behind the numbers to Warner’s character and found him to be a genuinely benevolent person.”
Prosecutors also chose to charge him with only a single count of tax evasion and recommend a year and a day in prison, well below the advisory range of 46 to 57 months, the panel wrote. Warner paid a $53.6 million penalty -- or half of the high balance of his undeclared offshore assets.
“If $53.6 million were insufficient, the government could have insisted on more before entering into the plea agreement,” according to the panel.
The judges also disagreed with the government’s emphasis on four other tax offenders who got a year and a day in prison with far lower evasions than Warner. The panel said the law forbids “unwarranted” sentencing disparities.
“Warner is not similar to the government’s comparators,” the panel wrote. “None of them offered evidence of significant charity or otherwise impressed the district court with their personal character, as Warner did.”
It also noted that probation is a common sentence in offshore tax evasion cases.
The appellate case is U.S. v. Warner, 14-1330, U.S. Court of Appeals for the Seventh Circuit (Chicago). The lower-court case is U.S. v. Warner, 13-cr-00731, U.S. District Court, Northern District of Illinois (Chicago).